August 2012

08/30/2012

Freedom Films, LLC sued Nu Image, Inc., and M3 Media, Inc. for breach of contract, accounting, and fraud, adding doe defendants later as alleged alter egos. Defendants moved to compel arbitration under an arbitration provision. The trial court denied the motions on the ground that the parties had not agreed to arbitrate Freedom Film’s rights as to the picture entitled The Mechanic. The original named defendants and the doe defendants appealed. Freedom Films, LLC v. Nu Image, Inc., et al., Case Nos. B236216, B236765 (2nd Dist. Div. 1 August 30, 2012) (Rothschild, J., author) (unpublished.).

The problem for defendants was that there were three different agreements knocking about, rather than working smoothly together – and because an agreement to arbitrate the rights at issue could not be incorporated by reference, both the trial court and the Court of Appeal concluded that there was no agreement to arbitrate.

Freedom Films sued upon a January 23, 2009 letter agreement entered into with Nu Image and Home of the Brave Productions. But the letter agreement did not contain an arbitration provision.

A 2006 distribution agreement between MGM, and Nu Image did contain a dispute resolution provision. Furthermore, a February 10, 2009 settlement agreement entered into by MGM, Nu Image, Home of the Brave Productions, and Freedom Films, incorporated the dispute resolution provision in the distribution agreement. So why didn’t that result in a binding agreement to arbitrate? Two problems here.

First, Freedom Films sued on the letter agreement, not the settlement agreement, and the settlement agreement did not exist at the time of the letter agreement.

Second, though the letter agreement did refer back to audit rights in the 2006 distribution agreement, it failed to clearly incorporate the 2006 arbitration provision that was incorporated in the February 2009 settlement agreement. SeeAmtower v. Photon Dynamics, Inc., 158 Cal.App.4th 1582, 1608 (2008) (“subject document must contain some clear and unequivocal reference to the fact that the terms of the external document are incorporated”)..

Defendants made the additional argument that it was for the arbitrator to decide whether the dispute was subject to arbitration. Here the court distinguished between deciding whether there was an agreement to arbitrate (decision for the court) and whether the dispute was within the scope of the arbitration provision (maybe a decision for the arbitrator, but not at issue).

The orders denying motions to compel arbitration were affirmed.

Comment: the lesson for practitioners is that one must be very careful with incorporations by reference. The incorporation should be clear and unambiguous to be effective. A further problem arises when the document one would have liked to incorporate doesn’t yet exist.

Blawg Bonus: “Hollywood accounting (also known as Hollywood bookkeeping) refers to the opaque accounting methods used by the film, video and television industry to budget and record profits for film projects.” Wikipedia entry, “Hollywood accounting.”

08/29/2012

On August 27, 2012, Leslie Kaufman reported in the New York Times, that Harvard law professor Roger D. Fisher died at the age of 90. Professor Fisher was a co-author with William Ury and Bruce Patton, of the mediation ur-text, “Getting to Yes.” Professor Fisher also co-founded the Harvard Negotiation Project. He also advised on resolving conflicts around the globe.

His New York Times obituary included the following:

“His emphasis was always on addressing the mutual interests of the disputing parties instead of what separated them.”

And, on the occasion of his 80th birthday, his colleague John Kenneth Galbraith toasted him:

“Whenever I thought ‘Someone should do something about this,’ it eased my conscience to learn that Roger was already working on it.”

Denial of Motion to Compel Arbitration Hinges on Burden of Proof and Existence of Statutory Rights

One of the “hot topics” we have posted about is whether the right to sue in court can be waived when the rights at issue are statutory rights. See our June 5, 2012 post on Iskanian v. CLS Transportation Los Angeles, LLC, Case No. B235138 (2nd Dist. Div. 2 June 4, 2012) (certified for publication) (interpreting AT&T Mobility v. Concepcion broadly to hold that the Federal Arbitration Act “conclusively invalidates the Gentry test” for finding that a statutory right is unwaivable and cannot be arbitrated); and our June 14 post on Hoover v. American Income Life Insurance Company, Case No. E052864 (4th Dist. Div. 2 May 16, 2012) (certified for publication) (underscoring a split in the law, concerning the arbitrability of state statutory labor claims). Ordinarily arbitrability turns on contractual interpretation and contract defenses.

Our next case, however, is important because of its particular focus on the burden of proof. InBartoni v. American Medical Response West, A130333 (1st Dist. Div. 2 August 24, 2012) (Kline, P.J.) (unpublished), the trial court refused “to compel arbitration of plaintiffs’ wage and hour claims, where it determined the collective bargaining agreements (CBAs) between the union and defendant did not contain a ‘clear and unmistakable’ waiver of plaintiffs’ right to a judicial forum for their statutory claims.” The employer appealed.

The opinion is notable for its extensive review of cases applying the “clear and unmistakable” standard to determine whether there has been a waiver of a judicial forum. Wright v. Universal Maritime Service Corp., 525 U.S. 70 (1998) established the standard. In Wright, though the CBA contained an arbitration provision, a longshoreman filed suit in district court under the Americans With Disabilities Act of 1990. The district court dismissed the case because the employee failed to pursue grievance procedures in the CBA, the Fourth Circuit Affirmed, and the Supreme Court reversed, because the CBA did “not contain a clear and unmistakable waiver of the covered employees’ rights to a judicial forum for federal claims of employment discrimination.” Id. at 82. The rationale for the “clear and unmistakable” standard is that where the employee’s rights are created by statute, the ultimate question for the arbitrator will not be contractual interpretation, but an interpretation of what federal law requires – an issue for judicial determination, unless there is a “clear and unmistakable” waiver of the right to have a judge decide.

The court explains in Bartoni: “In applying the Wright analysis to determine whether there has been a sufficient explicit waiver, courts look to the generality of the arbitration clause, explicit incorporation of statutory requirements, and the inclusion of specific statutory provisions.”

Applying the Wright analysis in Bartoni, the Court of Appeal found that the arbitration provision was “too general”, ambiguous, and failed to incorporate specific statutory provisions regarding wage and hour disputes. It treated the use of the word “dispute” as too general in context, and borrowed the scorn heaped upon the ambiguous phrase “and/or” by legal writer Bryan A. Garner: “A legal and business expression dating from the mid-19th century, and/or has been vilified for most of its life – and rightly so.” (Bartoni, footnote 3).

The court’s extensive review of federal and state cases analyzing a CBA waiver of a statutory right led it to observe few cases hold a CBA waiver of a statutory right was clear and unmistakable, whereas, “numerous California cases have concluded CBAs failed to clearly and unmistakably require arbitration of statutory claims.”

The order denying the motion to compel arbitration was affirmed.

Labor strategists confer. 1937. From the left: Sidney Hillman, member of the CIO; Homer L. Martin, President of the U.A.W.; Leo Pressman, CIO General Counsel; John L. Lewis, President of the United Mine Workers; and John Brophy, Director of the CIO.

Procedural unconscionability is rarely a difficult issue in such cases, since an adhesion contract is involved. Here, as described by the Court of Appeal, there was a “stack of preprinted form documents”, lack of an opportunity to read all the documents or to negotiate the terms, and lack of evidence that purchaser was clearly informed about the arbitration provision. The contract documents were long and printed on both the front and back sides of the pages. Though language in bold print on the front side of the preprinted contract did state that the contract contained an arbitration clause on the reverse side, “there is no provision for Goodridge’s signature or initials under or adjacent to that language.” The Court of Appeal readily concluded that there was both “oppression and surprise”, adding up to procedural unconscionability.

The contract was also found to be substantively unconscionable, because it was too one-sided (though printed on both sides). First, the arbitration clause provided either party could appeal an arbitrator’s award if it exceeded $100,000. Second, each party could appeal an arbitrator’s award of injunctive relief against it. Third, the arbitration clause provided an appealing party must pay the filing fees and other arbitration costs for appeal, subject to a final determination. Fourth, the arbitration clause did not apply to self-help remedies, including repossession. The court found that those provisions benefited the seller far more than the buyer. Because the contract had four problems permeating it with unconscionability, a court exercising its discretion could properly refuse a request to save the contract by severing unconscionable terms.

COMMENT: Footnote 1 of Goodridge notes, “the circumstances (e.g., preprinted contract and arbitration clause) and issues in this case are virtually identical to those in Sanchez v. Valencia Holding Co., LLC (2011) (A201 Cal.App.4th, review granted Mar. 21, 2012, S199119 (Sanchez). The California Supreme Court will likely make the ultimate determination of the issues discussed in this case.” The California Courts of Appeal website describesSanchez for the public and the press: "Petition for review after the Court of Appeal affirmed an order denying a petition to compel arbitration. This case includes the following issue: Does the Federal Arbitration Act (9 U.S.C. ? 2), as interpreted in AT&T Mobility LLC v. Concepcion (2011) 563 U. S. __, 131 S.Ct. 1740, preempt state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable?”

08/24/2012

Second District Division 2 Concludes That Arbitrator Did Not Disregard Choice Of Law Provision

Roller Bearing Company of America (RBC) manufacturers roller bearing assembly parts and Honeywell International use them in engines it manufacturers. Roller Bearing Company of America, Inc. v. Honeywell International, Inc., Case No. BS127074 (2nd Dist. Div. 2 August 23, 2012) (Chavez, J.) (unpublished) is a contract dispute between the two companies. The arbitrator issued a ruling in favor of Honeywell in this breach of contract dispute, the judgment confirmed the award, and RBC appealed.

Inspector at the Fafnir Bearing Company inspecting large roller bearing which will probably end up in an Army tank. 1943. Gordon Parks, photographer. Library of Congress.

The main issue in the case was whether the arbitrator disregarded a New York choice of law provision in order to consider inadmissible parol and extrinsic evidence to contradict the terms of the contract. Honeywell argued that the arbitrator’s disregard of the parties’ contractual choice of law provision constituted “manifest disregard of the law.

We posted on August 21, 2012 about Comerica Bank v. Howsam, et al. Case No. B232749 (2nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) , explaining that “manifest disregard of law” is not a ground for vacating an arbitrator’s award in California. The grounds for vacatur are set forth in Cal. Code Civ. Proc. section 1286.2, and “manifest disregard of the law” is not one of those grounds. The court concluded the same here, but then treated the argument as one that the arbitrator “exceeded the scope of his authority” by refusing to apply New York law governing parol evidence and integrated contracts. The different label placed on the argument allowed the court to consider whether it provided a basis for vacating the award. However, the court then concluded that the argument the arbitrator had disregarded New York law was “flatly contradicted” by the record. The arbitrator had considered extrinsic evidence to interpret ambiguity, something permitted under New York law and the law of most states.

RBC’s argument that the arbitrator admitted inadmissible parol and extrinsic evidence was “simply another way of saying that the arbitrator committed legal error.” But legal error is not a ground for vacating an arbitration award.

With this post, we inaugurate a new sidebar category: “Arbitration: International.”

Comerica Bank v. Howsam, et al. Case No. B232749 (2nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) involves appeals from orders confirming three international arbitration awards. The underlying disputes concerned Comerica Bank’s loans totaling $37 million to Mr. Howsam, a Canadian resident, and various Canadian corporations controlled by him. The loans were to fund the production of seven films. The loans, which the bank alleged had been obtained through fraud, were not repaid. The bank initiated legal action, and several defendants moved to compel arbitration. The arbitrator found in favor of the bank, the superior court denied a motion to vacate the awards (vacatur), and appeals followed.

The Court of Appeal affirmed across the board, after addressing four issues.

First, the Court of Appeal discussed whether the arbitrator’s failure to timely disclose an alleged disqualifying factor – he had once had signature authority for a client on a Comerica Bank account – is a proper vacatur ground (i.e., a ground upon which the trial court judge could have vacated the arbitration award). However, the failure to timely disclose potential disqualifying circumstances, as required by “Arbitration and Conciliation of International Commercial Disputes” provisions of the Code of Civil Procedure, specifically, section 1297.121, simply is not a ground for vacatur under section 1286.2(a)(6)(A) , the ground relied upon by Defendants, and governing vacatur by the trial judge of an arbitration award. Therefore, the trial judge did not err by failing to vacate an award on the basis of a disqualifying factor in international arbitrations that is not a basis for vacatur under 1286.2(a). The Court of Appeal notes, however, that failure of the arbitrator to disclose disqualifying factors in an international arbitration is not immune to review – but it requires following a different procedural path: “A litigant remains free to raise the failure to disclose issue in a writ petition.” Beware: trap for the unwary.

Second, the Court of Appeal concluded that the award was not secured by corruption, fraud, or other undue means. Billing errors of the arbitrator had no bearing on the outcome, and were explainable by procedural complexities “with fast moving substantive changes being pursued by both sides.”

Third, the award did not result from a manifest disregard of the law – an issue forfeited in any case by Defendants who withdrew from the arbitration and who therefore failed to raise the point before the arbitrator.

Fourth, the arbitrator did not exceed his power when he decided alter ego issues. The rules of the arbitral organization (Independent Film & Television Alliance) and Code of Civ. Proc. section 1297.161, providing that in international arbitration, the arbitrator may rule on his or her own jurisdiction, allowed him to do decide alter ego issues.

COMMENT: We gleaned interesting tidbits from this case.

First, title 9.3 of the Code of Civil Procedure, entitled “Arbitration and Conciliation of Commercial Disputes”, sections 1297.11 et seq., while similar to domestic arbitration provisions, also differs substantially in some respects, for reasons that are not intuitively obvious. For example, “the disclosure duties and the consequences of a failure to disclose differ in domestic and international arbitrations.” Therefore, if you have a case involving international arbitration, we urge you to read Cal. Code of Civ. Proc. sections 1297.11 et seq. Comerica Bank v. Howsam will also be a useful case to read.

Second,”federal Courts of Appeals are divided as to whether the arbitrator’s manifest disregard of the law remains a basis for vacatur in federal court . . . . But one thing is clear, an arbitrator’s manifest disregard of the law is not a ground for vacatur under California law.”

08/20/2012

Mediation Was A Condition Precedent To Litigating And Failure To Mediate Had Earlier Prevented The Homeowner From Suing To Enforce A Settlement Agreement

The homeowner (an in pro per attorney) and homeowner’s association (HOA) have been involved in a battle royal resulting in four appeals. Appeal No. 1: trial court dismisses homeowner’s lawsuit as settled; affirmed on appeal. Appeal No. 2: Homeowner challenges settlement, three of 15 defendants are dismissed after winning anti-SLAPP motion; affirmed on appeal. Appeal No. 3: Defendants who prevailed in first appeal are awarded attorney’s fees; affirmed on appeal. Trial court enters judgment on dismissal after an order sustaining demurrer without leave to amend, filed in case with the 15 defendants. And this leads to the fourth appeal. Adams v. Newport Crest Homeowners Association, G045590 (4th Dist. Div. 3 August 16, 2012) (Moore, J., author) (unpublished.)

The HOA asserted the homeowner’s claims concerning breach of the settlement agreement had been fully adjudicated and resolved by the first appeal, barring further claims under the doctrine of res judicata. In Appeal No. 1, the Court of Appeal held that the settlement agreement was binding and that disputes thereunder had first to be submitted to a mediator, rather than a court.

However, by the time of Appeal No.4, homeowner and HOA had mediated. Furthermore, homeowner purported to state new wrongs related to the implementation of the settlement agreement going forward from the time of settlement. Therefore, homeowner had complied with the requirement that she mediate first before litigating, and homeowner was not trapped by res judicata, because the wrongs she sought to allege were fresh ones.

“It would appear that Adams [the homeowner] has not always understood this court’s directions to her,” said the court. “However, this time,” the court added, “her understanding was ‘spot on’.”

The judgment of dismissal was reversed. The homeowner will be allowed to amend her complaint. Also, the HOA’s request for additional attorney’s fees was rejected, as the judgment was reversed. The homeowner is batting .250 on appeals with her HOA.

NOTE: On July 1, 2012, we posted on the earlier appeal, in which the Court of Appeal affirmed the fee award in favor of the HOA, resulting from the homeowner’s failure to mediate, which failure resulted in a violation of the settlement agreement.

On March 20, 2012, we posted about Lindemann v. Hume, et al.,Case Nos. Nos. B226106, B233273 (2nd Dist. Div. 7 filed February 21, 2012) (Perluss, P.J.), a case in which the Court of Appeal affirmed the trial court’s order denying a motion to compel arbitration. This was a real estate sale/water intrusion/nondisclosure case. A motion to compel the Buyer to arbitrate raised “a possibility of conflicting rulings on common issues of law and fact if the nondisclosure causes of action against [the Seller] were ordered to arbitration and the litigation against [the Developer] proceeded in superior court” – the basis for denying the motion to compel arbitration. Actor Nicolas Cage is the beneficiary of the trust acting for the Seller, so we placed the case in our ‘celebrities” sidebar category.

The City News Service reported on August 17, 2012, that Superior Court Judge Rolf M. Treu found in favor of the trust set up for the Buyer, and awarded $165,510 in attorney’s fees – a loss for the Oscar winner.

On August 17, 2012, Rep. Dennis Kucinich authored a short article in the Huffington Post, entitled “Consumers fight Big Banks for a Day in Court.” He objects to banks’ imposition of mandatory arbitration upon consumers. Rep. Kucinich bemoans that banks “erect massive structures of red tape that most American families don’t have the timore or money to fight.”

“My staff followed up with all the major banks,” writes Kucinich, “and, over the course of several months, nine of those banks abandoned the practice of using arbitration to collect their credit card debts.”

Arbitration is a matter of consent, right? Because there can be no meaningful consent between a developer that drafts covenants, conditions, and restrictions containing a provision requiring arbitration of construction disputes, and a homeowner's association (HOA) that doesn't yet exist, how can the HOA in such circumstances be bound by the arbitration clause? That was the view of the Court of Appeal in San Diego, 4th District Division 1, which found, by a split vote, that the arbitration clause did not constitute an agreement sufficient to waive the HOA's constitutional right to a jury. But the California Supreme Court, with a five person majority, two concurrences, and one dissent, does not agree. Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, Case No. S186149 (Sup. Ct. August 16, 2012) (Baxter, J., author for the majority).

Justice Baxter explains, "it is no surprise the courts have described recorded declarations ascontracts." (emphasis added). The use of that little word "as" discloses a legal fiction, because while CC&Rs may act "as" contracts, they are not identical to contracts. In particular, they may be binding even where contractual privity is lacking, under the common law of equitable servitudes, and under the Davis-Stirling Act.

And so the majority opinion concludes:

"Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration – which manifest the intent and expectations of the developer and those who take title to property in a community interest development – will be honored and enforced unless proven unreasonable. Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration."

Justice Werdegar, concurring, points out that "the majority never clearly states whether the grounds for enforcement lie in contract or real property law." She agrees that contract law does not result in enforceability, because there is no meaningful consent between the developer and an HOA that is automatically subject to "whatever the developer has seen fit to insert in the declaration, without any opportunity to reject those terms." But she believes that the arbitration provision may be enforced as an equitable servitude -- even if not an equitable servitude at common law, then under the Davis-Sterling Act.

Justice Lui joins the opinion of the Court with the proviso "whether or not the arbitration provision is contractual in the strict sense, it is appropriate in this case to use the substantive unconscionability inquiry from contract law to determine whether the arbitration clause is reasonable and hence lawful."

Finally, Justice Kennard dissents, "because of the association's lack of consent to the arbitration provision." She would affirm the judgment of the Court of Appeal.

COMMENT: We posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, another 4th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in CC&Rs was not enforceable between the HOA and the developer, or between the developer and a class of owners on whose behalf the HOA sued. The Supreme Court granted a petition for review on July 25, 2012. Will today's Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?

08/15/2012

Arbitrator’s Professional Relationships Were Too Attenuated to Require Disclosure

On July 26, 2012, we posted about Nemecek & Cole v. Horn, Case No. B233274 (2nd Dist. Div. 8 7/23/12). The case, involving a significant fee dispute between a client and the client’s law firm, addressed whether an arbitrator should have disclosed certain professional relationships. Unpublished when we posted before, the case was certified for publication today, August 15, 2012.